The Chicken and Egg Problem and How to Solve It - Zibtek Blog
The Chicken and Egg Problem and How to Solve It

The Chicken and Egg Problem and How to Solve It

You can find a lot of articles that talk about marketplaces. We will here attempt to understand a few of these theories about marketplaces and look at how various companies follow a particular strategy. One can measure the success of a company using various methods. But, we can understand it a lot better when we look at how efficiently businesses use capital and revenue.

Every business starting out needs to capture the attention of potential customers and scale the business to reach more customers. Looking at tried and true methods already used by successful businesses is the fastest way to learn what works.

Things That Will Assist You In Building a Marketplace
Things That Will Assist You In Building a Marketplace

Which came first: the chicken or the egg?

At its most basic level, a marketplace is nothing more than a mechanism for connecting people looking to sell with people looking to buy. Without that connection, suppliers would not be able to reach customers. Thus, the marketplace can charge a commission or fee on everything sold, because it is undeniably adding value and playing a vital role in the seller and customer experience. The perennial question, “What came first, the chicken or the egg?” applies here. Suppliers don’t want to be part of a market that is just starting out, so how does a new marketplace take off? Here a few strategies employed by successful marketplaces:

 

Strategy 1: Single Player Mode

With strategic thinking, a business can overcome the “chicken and egg problem” by successfully getting both buyers and sellers interested in the new marketplace. There are several different ways to approach this. Sangeet Paul Choudary calls OpenTable’s seeding strategy the “Standalone Mode.” Chris Dixon calls this strategy “Single Player Mode.” In its early stages, OpenTable marketed software to restaurants and charged a subscription fee.

The unique CRM and table management system that they developed was something most of the restaurateurs wanted. By giving restaurant managers something they can benefit from on its own, OpenTable had half of the marketplace equation solved.

Once they were able to acquire more than a few hundred restaurants in the city, they began to offer diners a good reason to use the app. It is also quite interesting for us to note that almost all of the successful companies follow this strategy to become efficient. Marketplaces that choose to follow this seeding approach are 10x more capital efficient than those who do not follow this method.

More than a third of marketplaces use single player mode as the basis of their development strategy. In the case of OpenTable, they first acquired restaurants (the supply) before getting the diners (the demand).

Now, a very famous example of a company that chose Single Player Mode is Amazon. Before it became the internet behemoth it is today, Amazon was a lowly bookseller. It used to purchase books from publishers and competing bookstores and turn around and sell them online direct to consumers. Thus, they had something to offer buyers as the foundation of what grew to a massive marketplace. Once Amazon had a huge customer or buyer base, they started allowing supply-side players to enter the marketplace.

2nd Strategy: Find Customers for Suppliers

Now, a third of marketplaces used a different method to seed supply. It is the way the suppliers can get rid of their surplus inventory, and it will also provide additional income for the existing business, which is never a bad thing.

Groupon used this particular strategy to create a marketplace. They reached out to merchants first and asked them to see if they’d be interested in offering gift cards or other promotions at a discounted rate. It is one of the great ways to attract a lot of new customers and also fill in slow periods. The service didn’t cost businesses anything; Groupon just takes a small percentage of the sale.  

Groupon used to offer one discounted promotion per day, and they used platforms such as Google and Facebook to market these products aggressively. They were successful in acquiring supply before creating any traction in demand. Uber is another company that followed this path to build a thriving marketplace.

 

3rd Strategy: Build a Marketplace Where Buyers can sell and Sellers can Buy

The last of the most popular strategies for building marketplaces is to focus on building an environment in which buyers can also sell. It is an excellent way to acquire both demand and supply. The successful businesses that have followed this approach to cultivating demand and supply at once are shopping apps such as Craigslist and eBay.

This strategy will not work unless you have a lot of overlap between people interesting in buying and those looking to sell. Once up and running, these types of marketplaces generate continual transactions. Of course, you need something to bring people in the door, so to speak. To attract the initial set of users, some companies following this strategy have employed TV ads.

 

In conclusion:

It is interesting to note that the marketplaces that are seeded using a single player mode will have almost 10x the advantage when it comes to capital efficiency. This strategy seems to be a better option than finding buyers for the suppliers. The reasons why the single-player mode strategy is the best is because there is far less competition and lower churn. If you have plans to use any other strategies, it’s a good idea for you to consider various setbacks before taking things forward.

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